Clients could be missing out on significant tax savings because many advisers do not understand the way minimum pension payments can be made.
Allan McPherson of Allan McPherson Consulting told delegates at the recent Small Independent Superannuation Funds Association SMSF Forum it was not always necessary to make minimum pension payments through an income stream, which would be fully taxable to people aged under 60.
A tax-free lump sum payment would satisfy the requirements in some cases, as long as the client had unrestricted access to their retirement benefits.
“You can draw $180,000 out in a lump sum and not pay tax on it, but if you draw the amount as a pension it becomes taxable income,” McPherson said.
“It’s something that is relatively new and a lot of [planners] are not doing it.”
In-specie lump sum commutations may also count, provided a balance remained in the pension fund after the transfer.
The strategy is not applicable to all clients, but may suit retirees aged between 55 and 59 who have account-based pensions and are able to access their funds as an unrestricted lump sum.
Members of large superannuation funds might find it difficult to convince their super fund to release the money as a lump sum, as there might be system barriers, but SMSFs should not be subject to such restrictions, McPherson said.
The Australian Taxation Office (ATO) issued superannuation determination 2013/2 in July confirming that it would allow the strategy for lump sum payments.
McPherson said people who were still working and had a transition-to-retirement income stream could also use the strategy if they had unrestricted benefits in the fund. However, he warned that the ATO had not specifically ruled on whether lump sums could count as payments for transition-to-retirement pensions.
For clients who could still add to super, the strategy could be combined with a recontribution strategy, an avenue McPherson said was also being underused by advisers.
In a recontribution strategy, the client would contribute part or all of the withdrawn lump sum amount back into the super fund. That amount would then become part of the fund’s tax-free component, which provides a tax saving on income streams withdrawn before age 60 and on lump sum death benefit payments made to dependants.